Ethical Investing
and the Big Banks

If you want socially responsible investments (SRI) in your
trust portfolio you must put it in the trust formation
document and then select both a trustee and an investment
manager who really knows socially responsible investing.
Although the tide is changing, still very few big banks will
manage a trust fund with social responsibility in mind.

Most bank wealth management departments, as well as individual
money managers cut corners; few really deeply understood
socially responsible investing. You need someone really smart,
really experienced and really progressive, someone who wants a
better world at least as much as they want to make money.
Ethical investing is not easy.

The Magic of Ethical Investing?

Ethical Investing. Socially Responsible Investing (SRI).
Environmental, Social Justice, Corporate Governance (ESG).
Shareholder activism. These are not magic bullets. This is
what you need to know:

When you look at the individual stocks in a typical
socially responsible investing mutual fund, you find unusual
stock choices (nondairy creamers), and a too heavy
allocation to some sectors (bank stocks)

While shareholder activism has some impact and should not
be abandoned, study after study shows it is largely
ineffective.

A Private Equity Example of Shortcuts.

Taking an example of a small private equity firm (that shall
remain anonymous and that except in this one example seems to
be an excellent company) that specializes in investments in
"frontier markets". Frontier markets include countries that
are even newer to large-scale capitalism than emerging
markets; these countries may have only just started their own
stock markets, many of them are emerging from decades-long
civil wars. This private equity firm went so far as to hire a
Harvard graduate with a masters in public health to ensure the
social responsibility of the firm's investments. Their stated
policy was that, among other ethical no-no's, this fund did
not invest in alcohol. A private equity group has a limited
number of ventures that it invests in at any one time. However
one of these ventures was a beer brewery. The private equity
firm justified the investment by adding the caveat to their
prospectus that their investment policy was no alcohol, except
beer and wine. I can't see how someone with a masters in
public health could have ethically justified funding a brewery
in a Muslim-Hindu country that had just finished a violent
civil war.

Ethical investing is becoming more popular, but the truth is,
research shows, most people--the majority of investors--do not
care enough about ethical investing to significantly change
their portfolios. There is a lot of window dressing of
essentially the same portfolios. One analysis found that the
people most interested in socially responsible investing are
young, single, college educated women who don't have much
money. (Joan C. Junkus, Thomas C. Berry, "The demographic
profile of socially responsible investors", Managerial
Finance, Vol. 36 Iss: 6, pp.474 - 481).

There are, however, a number of economics researchers who are
championing the need for socially responsible and socially
responsive economic systems. John Nash is the 1994 Nobel
laureate in Economics (and subject of the movie "A Beautiful
Mind"). Nash's recent work focuses on how to make the
international money system more fair. (See the paper, "Ideal
Money," in Southern Economics Journal, 2002.) Joseph Stiglitz
is the 2001 economics Nobel laureate, and author of the recent
bestselling book, The Price of Inequality.

If you buy DIV, SPDR, EFA--any of the big Exchange Traded
Funds (ETF)--you are including a lot of companies that should
not be kept in business. Ethical investors would not put them
in their portfolios. But hiding behind acronyms, like EAFE, we
buy both good and bad companies, keep them all in business and
help finance their expansion.

Most mutual funds are as blindly unethical as ETFs.
Morningstar has a service that lets you see the stocks that
comprise each fund. A surprising number of popular mutual
funds still include tobacco stock. Some mutual funds had quite
high percentages (6%). But remember what was said above: few
people really care about socially responsible investing.
Ethical investing takes work, and in most people's minds,
ethical investing takes a back seat to profits.

Look at the exchange traded fund EFA, an index fund of
"international stocks" sold by iShares. EFA seeks to follow
the performance of stocks in Europe, Australasia, and the Far
East (the MSCI EAFE Index). One assumes that iShares has
significant latitude in choosing stocks, as long as the fund
mimics the performance of this overall market.

As of August 17, 2012, here are EFA's tobacco holdings:

1.03% British American Tobacco0.39% Imperial Tobacco Group0.27% Japan Tobacco1.69% Total in Tobacco

EFA also has 0.64% invested in liquor (Anheuser Busch).

This has real world consequences. Yale University's
endowment, in the second quarter of 2012, had about $9 million
invested in EFA (and many investors, institutional and
otherwise, follow Yale). So, Yale is spending over $150,000 to
increase smoking rates, a lot of that invested in initiatives
to increase tobacco use in developing countries. How can the
Yale School of Medicine sanction that? That is not paying
attention to global health. The total capitalization of EFA is
$34.4 billion, so that is $581 million dollars invested in
harming people's health. If you care about health, boycott EFA
until it changes its composition. Write letters to Yale and
their investment officer, David Swensen, until they change
their priorities.

Are Institutional Investors Hurting
Farmers?

Yes, without a doubt. Institutions, including big bank trust
departments, are using commodity ETFs that include
agricultural options. Derivatives are replacing actual assets
in the "real assets" allocation in portfolios. It is this type
of slight of hand (replacing the real with a financial fiction
that can packaged and re-sold) that caused the 2008 collapse.

The U.S. government has mandated that 40% of the U.S. corn
crop be used for biofuels. Sounds good, except that the UN
considers developed nation's use of food to power cars, when
people in developing nations are starving and malnourished, an
actual crime against humanity.